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U.S. stocks advanced, sending the Dow Jones Industrial Average to the highest level since July, after reports bolstered optimism in the American and German economies and Spain’s borrowing costs decreased at an auction.

Equities pared gains as financial shares slumped, with Citigroup Inc. (C) losing 8.2 percent amid an unexpected drop in earnings. Wells Fargo & Co. (WFC), the largest U.S. bank by market value, gained 0.7 percent amid record profit. Sears Holdings Corp. (SHLD) surged 9.5 percent, the most in the Standard & Poor’s 500 Index, on speculation that the company may seek to go private. Carnival Corp. tumbled 14 percent after the Costa Concordia cruise ship ran aground off the coast of Italy on Jan. 13.

The S&P 500 increased 0.4 percent to 1,293.67 at 4 p.m. New York time, paring an earlier gain of as much as 1.1 percent. The Dow rose 60.01 points, or 0.5 percent, to 12,482.07.

“The economic data broadly exceeded expectations,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion, said in a telephone interview. “That’s why we had an immediate lift to the market,” he said. “What the auction in Spain tells me is that the market is ahead of the rating companies.”

Stocks gained as manufacturing in the New York region expanded in January at the fastest pace in nine months. German investor confidence rose the most on record in January. Spanish borrowing costs fell at an auction as investors ignored S&P downgrades last week. China’s economy expanded at the slowest pace in 10 quarters, sustaining pressure on Premier Wen Jiabao to ease monetary policy.

Best Start
The S&P 500 is up 2.9 percent in 2012 for its best start to a year since 2003, according to data compiled by Bloomberg. At least 48 companies in the benchmark index are scheduled to report quarterly results this week. S&P 500 companies, which beat profit estimates in the previous 11 quarters, probably will report a 4.6 percent increase in per-share earnings during the September-December period, analysts’ estimates compiled by Bloomberg show.

Nine out of 10 groups in the S&P 500 gained. Among the biggest companies, Apple Inc. (AAPL) added 1.2 percent to $424.70. Exxon Mobil Corp. (XOM) advanced 1 percent to $85.69.

Wells Fargo added 0.7 percent to $29.83. Profit beat analysts’ estimates as mortgage financing improved. New mortgages rose 35 percent to $120 billion from the three months ended September at Wells Fargo, the biggest U.S. home lender, while dropping 6 percent from a year earlier.

Sears Surges
Sears surged 9.5 percent to $36.75. Sears, working to turn around four years of declining sales, has lost ground as shoppers have flocked to such rivals as Macy’s Inc. Edward Lampert, who owns about 60 percent of Sears and serves as chairman, may seek new capital and to reorganize operations, said Paul Swinand, an analyst with Morningstar Inc. (MORN) in Chicago.

“Restructuring is often easier taken under private hands,” Swinand said today in a telephone interview. “Anything that gives you more flexibility is an advantage.”

Kraft Foods Inc. (KFT) added 1 percent to $38.13. The food company said it will realign its U.S. sales organization and cut 1,600 jobs in North America throughout 2012 as part of its move to divide its snacks and grocery businesses.

Dish Network Corp. (DISH) rallied 1.2 percent to $29.10. AT&T Inc. (T) is under so much pressure to add wireless spectrum after its failed $39 billion bid for T-Mobile USA that it may be compelled to pay the highest premium in more than a decade to secure Dish.

With the industry facing network constraints and a scarcity of new spectrum that’s making Dish a target, President and Chief Executive Officer Joe Clayton says the company is open to future acquisitions.

Reasonable Price
At $50 a share, cited as a reasonable price by Alpine Mutual Funds, AT&T would have to pay a 77 percent premium for Dish, the highest in an acquisition greater than $5 billion by a telecommunications company since 2000, according to data compiled by Bloomberg.

The S&P 500 Diversified Financials Index retreated 2.2 percent for the biggest decline among 24 groups. Citigroup lost 8.2 percent to $28.22. Trading declines mirrored results at JPMorgan, which said last week that revenue in every investment- banking business fell from a year earlier.

Carnival (CCL) tumbled 14 percent, the most since 2001, to $29.60. The Costa Concordia was carrying more than 4,200 people when it ran aground hours after leaving a port near Rome to continue a Mediterranean cruise. The accident has left at least 11 people dead.

Royal Caribbean Cruises Ltd. (RCL), the second-biggest cruise line, fell 6.2 percent to $26.97.

Back to Work
Investors began to put cash back to work in January, buying U.S. stocks, as expectations for global growth climbed to a six- month high, a Bank of America Corp. survey showed.

A net 27 percent of the 214 respondents, who together manage $655 billion in assets, said they were overweight cash. That’s down from a net 35 percent in December. Asset allocators became the most bullish on American equities since April 2010, with the U.S. replacing emerging markets as their most favored region for equities.

“We have started the new year with investors much less pessimistic on global growth,” said Gary Baker, BofA’s head of European equity strategy at a press briefing in London. “This has translated into greater risk appetite. The U.S. has shown fairly consistent improvement, largely exceeding expectations.”